Clarifying the PMPRB and Canadian pharmaceutical pricing

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As I expected, on June 26th, the Attorney General of Canada (on behalf of the PMPRB) filed appeals of the recent decisions of the Federal Court in the Ratiopharm and Sandoz cases to the Federal Court of Appeal.

Hearing dates have not yet been scheduled. Normally, it takes about eight to fourteen months from the filing of the notice of appeal until the result of the appeal is known. Things don’t necessarily end there, as participants may also seek leave to appeal the Federal Court of Appeal’s decision to the Supreme Court of Canada.

The relatively recent case of Celgene Corp. v. Canada (Attorney General) provides some guidance as to how long the Ratiopharm/Sandoz appeals may take. The Celgene case involved an initial judicial review of a PMPRB Board order to the Federal Court, an appeal of that decision to the Federal Court of Appeal and, finally, an appeal to the Supreme Court of Canada. The Federal Court of Appeal issued its decision in the Celgene appeal nine months after the original Federal Court decision, and the Supreme Court of Canada issued its decision on the appeal of the Federal Court of Appeal decision 13 months after the Federal Court of Appeal’s decision (or just short of two years after the original Federal Court decision).

Therefore, we won’t have any more judicial clarity on the definition of a patentee for PMPRB purposes until the first quarter of 2015 at the earliest.

The Sandoz case was also heard by Mr. Justice O’Reilly and its reasoning and decision mirrors the Ratiopharm case below in that he rejected the PMPRB Board’s decision that Sandoz was a “patentee” subject to the Board’s jurisdiction.

The immediately noteworthy aspect of the Sandoz case is that it expands our understanding of the limits that the Federal Court would place on the PMPRB definition of patentee.

Whereas in the Ratiopharm case, the generic company was truly an arm’s length third-party that had acquired its rights to sell ratio-salbutramol HFA via a contract from GSK that clearly stipulated that GSK retained all intellectual property rights to the drug, Sandoz was and is a wholly owned subsidiary of parent company and patent holder Novartis (and its relationship and dealings with Novartis regarding generic products were not subject to any formal written contract). Nevertheless, the Federal Court still did not think that Sandoz could reasonably be considered a patentee.

I would not have been astonished if the Federal Court had concluded that Sandoz was a patentee within the jurisdiction of the PMPRB because the factual differences just noted supported a conclusion that Sandoz was in essence a corporate extension of the Novartis parent, and therefore Sandoz did in fact enjoy sufficient benefit of the patents held by the parent company.

This was clearly not the case, and the Federal Court in these two decisions certainly appears to be saying that the PMPRB’s jurisdiction is limited for usual and normal purposes to only those companies that are actually the patent holders, whether they be generic or innovator companies.

As stated below, both of these decisions will likely be appealed so there’s definitely more to come.

Mr. Justice O’Reilly has affirmed Ratiopharm’s contention that, with respect to its ratio-salbutamol HFA product, Ratiopharm was not a patentee within the meaning of the provisions of the Patent Act and related regulations.

In reaching its decision, the court relied on the fact that Ratiopharm held no patent, had no potential for monopoly power and did not enjoy any of the normal rights of a patent holder such as the power to sue for patent infringement. The judge does state that in the case of generic companies that actually do hold patents, he would consider them to be patentees subject to PMPRB jurisdiction.

The decision is grounded in the view that the Federal government’s ability to grant powers to the PMPRB flows from and must remain connected to the federal jurisdiction over patents of invention. The PMPRB Board’s decision that a generic company that was purchasing finished product from the actual patent holder (GSK) and that held no rights with respect to the underlying patent was a “patentee” was unreasonable as it would have taken the Board outside of its federally granted powers and into the exclusive constitutional jurisdiction of the provinces to regulate the prices of generic drugs.

The decision also included an affirmation of the court interpretation of the Pfizer v. Attorney General of Canada (2009) case. Mr. Justice O’Reilly clearly states that the PMPRB’s jurisdiction is restricted to the factory-gate prices charged by manufacturers to their first purchasers – and does not extend to subsequent transactions further down the chain of sale. A close reading of the decision suggests that any subsequent PMPRB decision that narrows the Pfizer decision – for example, a finding that only the review of subsequent transactions involving governments or governmental bodies is prohibited – would be overturned.

Given the significant potential impact of this decision, it will very likely be appealed by the Attorney General of Canada to the Federal Court of Appeal.

Two cases currently before the Federal Court of Canada could profoundly affect the PMPRB’s jurisdiction and the scope of its reviews. Both were argued in early November 2013 and, in the normal course, decisions would be expected very shortly.

The cases are Sandoz Canada v. Attorney General of Canada, and Ratiopharm (Now Teva) v. Attorney General of Canada.

Both cases are applications to the Federal Court of Canada for judicial review of PMPRB Board Panel decisions. The two cases raise a number of significant issues about the jurisdiction and scope of the PMPRB’s powers, including:

A potential new exclusion to who the PMPRB may treat as “patentees”;

Constitutional limits on the powers of the PMPRB to regulate drugs competing as “generics”; and

Clarification from Federal Court as to whether the PMPRB may regulate and consider rebates paid to non-factory-gate parties that are not governments.

Specifically, both applications raised the question of whether separate corporate entities that do not own or control any patents, and purchase patented drugs as finished goods from the IP-owning or controlling company “patentees”, are subject to the PMPRB’s jurisdiction (as opposed to the IP-owing companies that sell to them in the first place).

The facts of two cases vary: ratiopharm had written supply agreements for ratio-Salbutramol HFA with the manufacturer (and IP owner), GSK, but those agreements explicitly stated that ratiopharm had absolutely no express or implied rights with respect to any related patents; whereas Sandoz Canada, although a wholly controlled subsidiary of Novartis, did not have any written agreement with its parent and claimed to have no direct control over the patents held by the Novartis companies for five drugs (cyclosporine, famciclovir, azithromycin, estradiol and terbinfine). For these reasons, both argued at their Board Hearings that they did not fall within the definition of “patentee” as set out in PMPRB regulations and were not therefore subject to PMPRB jurisdiction.

Both companies also challenged the constitutionality of the provisions of the federal Patent Act upon which the PMPRB operates. Specifically, they argued that the empowering provisions of the Patent Act were only intended to grant the PMPRB power to regulate the prices of patented medicines sold by innovative pharmaceutical companies to ensure that exclusivity rights granted by their patents were not used to charge excessive prices. In their view, the powers of the PMPRB were never intended to extend to generic companies, which compete in a very different marketplace in which purchasers are already able to exert tight control over the prices of generic drugs.

These constitutional arguments were rejected by the PMPRB Board Panel, which, in both cases, relied on the Federal Court of Appeal’s decision in ICN v. Canada (1996) to rule that the constitutional authority of the PMPRB had already been definitively settled.

The ratiopharm action raises another question of critical importance to the branded pharma industry, namely, whether – despite the Federal Court’s ruling in the Rx&D’s successful challenge of the PMPRB’s move to review rebates paid to third party government formularies (Pfizer v. Attorney General of Canada (2009)) – ratiopharm was entitled to reduce its drug revenues by deducting certain “professional allowances” related to ratio-Salbutramol HFA that were paid to downstream parties that were not immediate (“factory-gate”) customers of ratiopharm.

The PMPRB Board Panel did not actually decide whether ratiopharm would be allowed, as a matter of law, to make those deductions because it found that insufficient evidence had been offered to prove the existence (and amounts) of those payments. However, the Board did state in its reasons that had there been sufficient proof, it would have allowed the deduction of those rebates – even if paid to third parties who were not “factory-gate” customers – as long as they were not paid to provinces in consideration for listing drugs. This is the narrowest possible interpretation of the Pfizer case.

This last point, though not central to the judical reviews, may turn out to be the most contentious of all.

The common wisdom of Canadian pharma companies after the Pfizer case has been that the PMPRB may not compel disclosure or seek to regulate rebates paid by innovator companies to any third parties who are not the immediate “factory-gate” customers of those companies – i.e. public formularies, but also pharmacies or other non-government entities further down the supply channel who do not buy directly from the pharma company. If the Board’s narrow interpretation is correct, the PMPRB would be within its rights to compel companies to report, for example, rebates paid as part of a listing agreement with a private health insurer.

Because the PMPRB Board in Ratiopharm merely offered its opinion on the proper treatment of those payments had they been proven, the pending Federal Court decision will not have to deal with the issue directly. However, any comments that the Federal Court does choose to make as to whether the Pfizer decision should be given a wide or narrow interpretation going forward should be very carefully analyzed by Canadian pharma companies as an indication as to the outcome of future cases.

As the ancient Chinese proverb says, “may you live in interesting times!”

Terms of the VCU agreed to by Teva Canada and the PMPRB to end proceedings in the Copaxone matter reveal a significant win for Teva.

Teva has agreed – without admission of excessive pricing – to pay a total fine of $248,222.32 to settle the matter. That’s a whopping $2.6 million or 91% less than the amount the Board Panel, in its decision of February 23, 2012, had ordered Teva to repay for cumulative excess revenues in the 2002 to 2007 period. It is also very telling to note that the final National Non-Excessive Average Prices (N-NEAPs) agreed to in the VCU are identical to those in the Board Panel decision of 2012 and so, under normal circumstances, based on the actual Copaxone transaction prices, would still amount to cumulative excess revenues of $2.8 million.

Even if you assume that Teva incurred legal fees of somewhere around $1.5 million for legal representation at its two prior Board Hearings and Federal Court challenges, it comes out well ahead in the deal, including a N-NEAP of $45.23 going forward in 2014. That’s almost 26% higher than Copaxone’s $36.00 ATP in 2003.

What does the PMPRB manage to take away from this whole affair?

Not much. It has been spared the prospect of either watering down the enforceability of its maximum allowable price increase provisions in a public decision of its own making in Hearing #3 or, very likely, it has escaped an unimaginable third quashing of a board hearing decision by the Federal Court. Clearly, the PMPRB had no appetite for either.

BREAKING NEWS: The PMPRB will release on its website later today the terms of a VCU that it has reached with Teva Canada to settle the long-running Copaxone dispute.

A two-day Board Panel hearing on the matter had been scheduled to start on February 18th. It would have been the third such hearing.

The terms of the VCU will be of particular interest to branded drug companies as PMPRB staff and Teva were in significant disagreement as to how the matter should be resolved, and Teva had been successful in having the Federal Court quash two prior PMPRB Board Panel decisions.

The Federal Court clearly stated in both prior decisions that the PMPRB Board in reaching a decision must give full consideration to each of the factors set out by Parliament in subsection 85(1) of the Patent Act and, importantly, in relying on one factor over the others, must clearly and intelligibly explain the reasons it has done so. In both reviews, the court found that the Board had merely paid “lip service” to all factors other than ‘changes in the Consumer Price Index’, upon which the Board placed primary weight in its decisions that Copaxone had been excessively priced.

In the most recent decision (April 30, 2013), Mr. Justice Zinn wrote that the PMPRB Board, in giving primary weight to the CPI factor without proper explanation or justification, had acted as if it was bound by the Guidelines – an error of law entitling Teva to a reconsideration of the Copaxone case by a new Board Panel. Only Board Staff are bound by the Guidelines; the PMPRB Board may consider the Guidelines, but is not bound to follow them. Instead, its primary consideration should be whether, based on the Patent Act and its applicable regulations, a drug may reasonably be found to have been sold at an excessive price.

This last minute VCU eliminates the need for the scheduled third Board Hearing. It also relieves the PMPRB Board of having to try once again to reconcile the apparently irreconcilable, namely, how a drug that is and has been the lowest priced among its Canadian comparators, and has a domestic price that is not higher than prices in the seven PMPRB reference countries – two of the factors set out in s. 85 of the Patent Act – can nevertheless be excessively priced because it took a series of price increases that exceeded allowable CPI-based limits as defined by the PMPRB Guidelines.

Observers will be looking closely to see just how much the PMPRB was willing to concede in the VCU in order to dispense with this third hearing and eliminate the potential for yet another trip to the Federal Court.

One aspect of the revised PMPRB Guidelines implemented in 2010 that was welcomed by the branded pharmaceutical industry was the change to the levels of therapeutic improvement. Specifically, the old three category system was expanded to four distinct levels: Breakthrough (BT), Significant Improvement (SI), Moderate Improvement (MI) and Slight or No improvement (SLNO).

The creation of a separate Moderate Improvement level of therapeutic improvement, with its own potentially more generous price test and the opportunity to show improvement via either primary factors (efficacy, reduction in side effects) or secondary factors (caregiver/patient convenience, simplification of dosage regimens etc.), was also positively received by the pharma industry.

Now, slightly more than four years after the implementation of the revised Guidelines, is a good time to take a closer look at the impact of the Moderate Improvement (MI) designation and ask ourselves some interesting questions:

Has the availability of the MI designation had an appreciable impact on the price reviews of new patient medicines in Canada?

Specifically, what proportion of new medicines has received the MI designation?

What is the breakdown between the MI designations based on primary factors and those based on secondary factors?

Coupled with the PMPRB’s stated goal of increased transparency of its decisions, do we have a better understanding of which factors are most likely to lead to a MI designation?

How Often is the Moderate Improvement Designation Granted?

Based on an examination of all decisions from 2010 to 2012, inclusive, the MI designation is overwhelming the most commonly granted designation among the elevated therapeutic improvement designations (BT, SI and MI)). Of the 277 DINs that were classified in that period, 49 (18%) were found to provide an elevated level of therapeutic improvement, of which, 25 (14%) received the MI designation; 7 DINs (3%) were granted the SI level, and another 4 (1.5%) received the top BT level (Figures 1 and 2).

– Figure 1 –

– Figure 2 –

Looking only at those 33 drugs[1] found to provide an elevated level of therapeutic improvement (Figure 2), the MI designation – at 76% – handily outnumbered the SI and BT designations (12% each).

Within the MI group of drugs, slightly more than half (55%, or 14/25 brands) of the designations were generated on secondary factors, while the remaining 45% (11/25 brands) were based on primary factors.

Which Attributes are More Likely to Lead to a Moderate Improvement Designation?

The easiest way to deal with this question is to look at the primary factors MIs (Mod-p) separately from the secondary factor MIs (Mod-s).

Moderate Improvement Based on Primary Factors (MOD-p):

At 6% of all DINs classified in the 2010 to 2012 period, the MOD-p designation (moderate improvement in efficacy and/or reduction in side effects) was the second most frequently granted improvement level, just behind the MOD-s designation. Figure 3 below breaks out my classification of the reasons why the designation was given.

– Figure 3 –

The fact that I found seven general categories of reasons in the MOD-p decisions is good news as it shows a fairly broad approach by the PMPRB to defining what may be considered moderate improvement on primary factors. I will leave a more detailed discussion of what appears to separate SI level drugs from MOD-p drugs to another posting. Suffice it to say that the types of reasons listed in Figure 3 already provide some clues: many highlight a shortcoming in clinical evidence, whether it is lack of an active comparator, the use of a surrogate measure or the failure to show significant results at all measured time intervals.

– Figure 4 –

Differences in the Levels of Clinical Evidence Between MOD-p and MOD-s Drugs

When we compare the relative strength of the clinical evidence submitted in support of MI-p designated drugs to MI-s drugs, not surprisingly, the MI-p drugs were on average backed by stronger clinical evidence: 82% of successful Mod-p drugs were backed by clinical evidence that would support a Grade A recommendation under the Oxford CEBM Grades of Recommendation[2], while MI-s drugs carried Grade A recommendation level evidence in 50% of cases. In addition, the majority of all MI designated brands (primary or secondary) were consistent with Grade B or better recommendations 76% of the time (91% for MI-p, and 64% for MI-s).

– Table 1 –

Importantly though, the absence of top-level clinical support did not preclude an MI-s designation. One brand received the designation on Grade C evidence, and 3 others did so on the basis of Grade D evidence (“level 5 or troublingly inconsistent or inconclusive studies of any level”). The Grade D evidence accepted consisted of unpublished expert opinion(s) submitted by the manufacturer (In one instance, the type of evidence was not specified).

What are the Key Takeaways About the Moderate Improvement Experience To Date?

The vast majority (82%) of DINs evaluated by HDAP/PMPRB staff are still assessed as providing Slight or No Improvement.

The MI designation (primary and secondary) is overwhelmingly the most frequently granted of the elevated therapeutic improvement designations: 14% of all DINs and 76% of elevated designation brands, versus Substantial Improvement (3% of all DINs and 12% elevated designations) and Breakthrough (1% of DINs and 12%, respectively).

The MI ranking based on secondary factors is the most frequently granted of the elevated therapeutic improvement factors at 43% of all elevated designations; MI-primary follows at 39%.

Those brands ranked as MI-primary do, on balance, have better clinical support than MI-secondary ranked brands, but 28% of all MI brands (primary and secondary) had Grade B or below equivalent clinical evidence; 3 MI-secondary rated brands succeeded on the basis of Grade D evidence (expert opinions).

While orthodox reasons for MI through secondary factors like ‘more convenient format’ (50%) and ‘less complex and/or frequent dosing’ (21%) are the most frequently reported, HDAP/PMPRB has shown some flexibility in accepting other factors as the basis for moderate therapeutic improvement.

[1]Brands launched with more than one DIN were only counted once. By eliminating multiple DINs, 49 DINs with MI or better ratings were reduced to 33 drug brands.